A report on sovereign wealth funds (SWFs) issues involved and possibilities for India

Abstract

Objective: The purpose of this work was to examine the possibility of India launching a Sovereign Wealth Fund. Given the set of divergent opinions put forward by several authors we wanted to test the hypotheses that India s foreign exchange reserves are more than adequate and that a Sovereign Wealth Fund (SWF) will be the best way of utilizing them profitably. Methodology: We have studied the existing literature and information available on SWFs to build the context in which to give consideration to an Indian SWF. We have then applied several tests of adequacy to India s foreign exchange (forex) reserves. These included the traditional and modern benchmarks of adequacy including Greenspan-Guid otti rule as well as a model that predicts the reserves required by a country based on several independent factors like current account position, openness of capital account etc. We have then evaluated the options available for use of these reserves. Results: We conclude that India has excess forex reserves and it should launch an SWF to invest these reserves gainfully. We also give a preliminary structure of this SWF, including the possible size, fund management and investment strategy. We estimate that India can invest up to a maximum of $56 billion of its forex reserves through this SWF.